HO-23: METHODS OF INVESTMENT APPRAISAL

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "HO-23: METHODS OF INVESTMENT APPRAISAL"

Transcription

1 HO-23: METHODS OF INVESTMENT APPRAISAL After completing this exercise you will be able to: Calculate and compare the different returns on an investment using the ROI, NPV, IRR functions. Investments: Discounting, Present and Future Values The term discounting refers to the estimation of the present value of future cash flows. For example, every 1 you have in your pocket today will have a different value in the future. If you deposit 100 in a savings account that returns a 6.5% annual rate of interest, your 100 will be worth in one year. In other words its future value is If interest rates remain fixed at 6.5% then after five years your 100 would be worth , i.e. the future value of 100 in five years time at an annual rate of interest of 6.5% = 100 x x x x x = Alternatively you may want to know the present value of 100 that you will receive in five years time. You can calculate the present value of your future 100, again assuming a rate of return of 6.5% = = You will examine the significance of discounting, present and future values in more detail below. But first a re-cap on the terms used in financial functions: Terms in Financial Functions rate: nper: pmt: pv: fv: type: The interest rate per period. The number of payment periods. The payment made each period. Remains unchanged over the life of the loan or annuity. The present value of an investment, or the original amount invested. The future value of an investment, or the cash balance you want to attain after the last payment is made. If fv is omitted it is assumed to be zero (fv = 0 for a loan) Indicates when payments are due: type= 0, payments due at end of period; type= 1, payments due at beginning of period; If omitted type is assumed to be zero. RATE(nper, pmt,pv,fv,type) Returns the interest rate per period of a given investment. For example: What interest rate do you need to double the value of an investment of 1000 over 10 years? Interest Rate =RATE(10,0,-1000,2000) =7.2% What interest rate do you need to generate 15,000 at the end of 5 years if you are depositing 2,000 per year into an investment account? Interest Rate =RATE(5,-2000,0,15000) = 20.4% How would the interest rate be affected if your account has an initial balance of 2,389? In this case the Interest Rate required =RATE(5,-2000,-2389,15000) = 7.4% NPER(rate,pmt,PV,fv,type) Calculates the number of payments required for an investment of present value (PV) to reach a future value (fv) while earning interest at rate. For example, how long will it take you to save 50,000 if the balance on your savings is currently 633 and you intend to bpho23.doc Page 1 of 5

2 deposit 2,000 at the end of each year? Assuming an interest rate of 11.5%, time needed: = NPER(11.5%,-2000,-633,50000) = years. FV(rate,nper,pmt,PV,type) Returns the future value of an investment where periodic payments (pmt) are invested for a number of periods (nper) at interest rate. PV and type are optional: type is 0 if payments are made at the end of the period, 1 if made at the start. Conventionally you use a negative number when money is paid out of your pocket, and a positive number when money is paid to you. For example: If you put 500 each year into a savings account earning 15% interest per annum then the value of your savings after 6 years =FV(15%,6,-500) = 4, If you currently have savings of 340 and decide to invest 250 each year for the next 10 years into an account earning interest at 15% per annum, then the value of your savings at the end of the period: = FV(15%,10,-250,-340) = if you deposited your money at the end of the month, OR = FV(15%,10,-250,-340,1) = if you deposited your money at the beginning of the month. PV(rate,nper,pmt,fv,type) Returns the present value of an investment. For example, you have just won a prize which is either: 20,000 per year for the next 12 years or a 30,000 bond which matures in 15 years. Which should you choose? Assume you will invest the regular payment at 10%. The present value of the regular payment = PV(10%,12,-2000) = 136, The present value of the bond = PV(10%,15,0,-30000) = 71, No contest! Comparison of Methods of Investment Appraisal: Payback, ROI, IRR and NPV. PAYBACK PERIOD The payback period is the length of time it takes to recover an initial investment from its annual cash flows. For example, assume that Bacchus Wines decides to open a new wine store at a cost of 220,000. Suppose, after taking into account the sales revenue from the store, business expenses and depreciation, it takes Bacchus 30 months to earn back the 220,000, then the payback period for this investment is 2.5 years. Note: there is no Excel Function for this, but the payback period is easily calculated. RATE OF RETURN ON INVESTMENT (ROI) The Average Rate of Return on an Investment (ROI) = Profit (per annum) Initial Investment. For example, assume that after 3 years Bacchus Wines makes of an overall profit of 60,000 on its new wine store. The profit per annum = 60,000 3 = 20,000. The initial investment = 220,000. Thus ROI = ( ) x 100 = 9.0%. As discussed above 100 today is not worth the same as 100 in five years time. In this respect, Payback and ROI both suffer from a major limitation, neither takes into account the time value of money. This limitation is overcome by two other Excel's functions, NPV and IRR. NPV(rate,values) Rate is the discount rate. Values is the range of cells containing the cash flows. bpho23.doc Page 2 of 5

3 NPV returns the net present value of an investment based on a series of cash flows (receipts or payments). A negative NPV means that the rate of return on the project is less than the discount rate, and it would have been better to have kept the money in the bank at the given rate of interest. In deciding on whether to invest in a particular project, you would generally accept projects with positive NPVs, the larger the NPV the better. However there is a need to NPV against the Payback Period. IRR(values,guess) Values is the range of cells containing the cash flows; guess provides an estimate of the final result, if nothing is entered Excel assumes a value of 10%. IRR returns the internal rate of return for an investment (i.e. a measure of its profitability), without financing costs or reinvestment gains. If IRR is less than the Discount Rate then NPV will be negative. The higher IRR the more positive the value of NPV. A Worked Example 1. Bacchus has the opportunity of investing in a project, which requires an initial investment of 60,000, but which will generate cash flows (receipts) of 10,000 per year for the following 10 years. Calculate (a) the Payback Period and (b) the ROI of the project. 2. If the discount rate is 15% calculate whether the project is worth undertaking, using (a) NPV and (b) IRR. 3. Insert a new worksheet and rename it ho23. Then construct a table that calculates the required values: 4. Finally add a scroll bar or spinner control that enables the user to perform what-if calculations by changing the value of the discount rate: bpho23.doc Page 3 of 5

4 An Investment Decision - Which Project? 5. Bacchus Wines has to choose between 3 projects, each costing 100,000 to implement: Project A involves the purchase of new equipment. Project B involves a promotional campaign to boost membership/sales. Project C involves rationalisation of the stores department. 6. It is estimated that the projects will generate the cash flows shown in the table below: Year Project A Project B Project C Investment: 0-100, , ,000 Cash In-Flows: 1 10,000 60,000 35, ,000 40,000 30, ,000 20,000 30, ,000 10,000 30, ,000 20, ,000 10, Calculate (a) the Payback Period and (b) the ROI of the project. 8. If the discount rate is 10% calculate (a) NPV and (b) IRR. 9. What project would you rank of greatest value to Bacchus on purely financial grounds? Would your decision change if the discount rate increased? Add a scroll bar or spinner control that enables you to perform What-If calculations by changing the value of the discount rate. FURTHER READING AND RESOURCES Making investment decisions using Excel: bpho23.doc Page 4 of 5

5 Investment Appraisal: Go with the cash flow: Calculate NPV and IRR in Excel: Use of the IRR Function in Excel: Using Excel for Finance: MS Excel as a Financial Calculator: page1 bpho23.doc Page 5 of 5

rate nper pmt pv Interest Number of Payment Present Future Rate Periods Amount Value Value 12.00% 1 0 $100.00 $112.00

rate nper pmt pv Interest Number of Payment Present Future Rate Periods Amount Value Value 12.00% 1 0 $100.00 $112.00 In Excel language, if the initial cash flow is an inflow (positive), then the future value must be an outflow (negative). Therefore you must add a negative sign before the FV (and PV) function. The inputs

More information

NOTE: All of the information contained in this file has been collected from the various HELP files found in Excel for each of these functions.

NOTE: All of the information contained in this file has been collected from the various HELP files found in Excel for each of these functions. NOTE: All of the information contained in this file has been collected from the various HELP files found in Excel for each of these functions. PV Returns the present value of an investment. The present

More information

Lease Analysis Tools

Lease Analysis Tools Lease Analysis Tools 2009 ELFA Lease Accountants Conference Presenter: Bill Bosco, Pres. wbleasing101@aol.com Leasing 101 914-522-3233 Overview Math of Finance Theory Glossary of terms Common calculations

More information

Excel Financial Functions

Excel Financial Functions Excel Financial Functions PV() Effect() Nominal() FV() PMT() Payment Amortization Table Payment Array Table NPer() Rate() NPV() IRR() MIRR() Yield() Price() Accrint() Future Value How much will your money

More information

PMT. 0 or omitted At the end of the period 1 At the beginning of the period

PMT. 0 or omitted At the end of the period 1 At the beginning of the period PMT Calculates the payment for a loan based on constant payments and a constant interest rate. PMT(rate,nper,pv,fv,type) For a more complete description of the arguments in PMT, see the PV function. Rate

More information

TVM Functions in EXCEL

TVM Functions in EXCEL TVM Functions in EXCEL Order of Variables = (Rate, Nper, Pmt, Pv, Fv,Type, Guess) Future Value = FV(Rate,Nper,Pmt,PV,Type) Present Value = PV(rate,nper,pmt,fv,type) No. of Periods = NPER(rate, pmt, pv,

More information

Problems on Time value of money January 22, 2015

Problems on Time value of money January 22, 2015 Investment Planning Problems on Time value of money January 22, 2015 Vandana Srivastava SENSEX closing value on Tuesday: closing value on Wednesday: opening value on Thursday: Top news of any financial

More information

How To Use Excel To Compute Compound Interest

How To Use Excel To Compute Compound Interest Excel has several built in functions for working with compound interest and annuities. To use these functions, we ll start with a standard Excel worksheet. This worksheet contains the variables used throughout

More information

$1,300 + 1,500 + 1,900 = $4,700. in cash flows. The project still needs to create another: $5,500 4,700 = $800

$1,300 + 1,500 + 1,900 = $4,700. in cash flows. The project still needs to create another: $5,500 4,700 = $800 1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project has created: $1,300 + 1,500 + 1,900 = $4,700 in cash flows.

More information

Prepared by: Dalia A. Marafi Version 2.0

Prepared by: Dalia A. Marafi Version 2.0 Kuwait University College of Business Administration Department of Finance and Financial Institutions Using )Casio FC-200V( for Fundamentals of Financial Management (220) Prepared by: Dalia A. Marafi Version

More information

Chapter 8. 48 Financial Planning Handbook PDP

Chapter 8. 48 Financial Planning Handbook PDP Chapter 8 48 Financial Planning Handbook PDP The Financial Planner's Toolkit As a financial planner, you will be doing a lot of mathematical calculations for your clients. Doing these calculations for

More information

Net Present Value (NPV)

Net Present Value (NPV) Investment Criteria 208 Net Present Value (NPV) What: NPV is a measure of how much value is created or added today by undertaking an investment (the difference between the investment s market value and

More information

6: Financial Calculations

6: Financial Calculations : Financial Calculations The Time Value of Money Growth of Money I Growth of Money II The FV Function Amortisation of a Loan Annuity Calculation Comparing Investments Worked examples Other Financial Functions

More information

( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100

( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100 Mariusz Próchniak Chair of Economics II Warsaw School of Economics CAPITAL BUDGETING Managerial Economics 1 2 1 Future value (FV) r annual interest rate B the amount of money held today Interest is compounded

More information

The Time Value of Money

The Time Value of Money The Time Value of Money Future Value - Amount to which an investment will grow after earning interest. Compound Interest - Interest earned on interest. Simple Interest - Interest earned only on the original

More information

(Relevant to AAT Examination Paper 4 Business Economics and Financial Mathematics)

(Relevant to AAT Examination Paper 4 Business Economics and Financial Mathematics) Capital Budgeting: Net Present Value vs Internal Rate of Return (Relevant to AAT Examination Paper 4 Business Economics and Financial Mathematics) Y O Lam Capital budgeting assists decision makers in a

More information

Chapter 02 How to Calculate Present Values

Chapter 02 How to Calculate Present Values Chapter 02 How to Calculate Present Values Multiple Choice Questions 1. The present value of $100 expected in two years from today at a discount rate of 6% is: A. $116.64 B. $108.00 C. $100.00 D. $89.00

More information

PV Tutorial Using Excel

PV Tutorial Using Excel EYK 15-3 PV Tutorial Using Excel TABLE OF CONTENTS Introduction Exercise 1: Exercise 2: Exercise 3: Exercise 4: Exercise 5: Exercise 6: Exercise 7: Exercise 8: Exercise 9: Exercise 10: Exercise 11: Exercise

More information

CHAPTER 9 Time Value Analysis

CHAPTER 9 Time Value Analysis Copyright 2008 by the Foundation of the American College of Healthcare Executives 6/11/07 Version 9-1 CHAPTER 9 Time Value Analysis Future and present values Lump sums Annuities Uneven cash flow streams

More information

Bank: The bank's deposit pays 8 % per year with annual compounding. Bond: The price of the bond is $75. You will receive $100 five years later.

Bank: The bank's deposit pays 8 % per year with annual compounding. Bond: The price of the bond is $75. You will receive $100 five years later. ü 4.4 lternative Discounted Cash Flow Decision Rules ü Three Decision Rules (1) Net Present Value (2) Future Value (3) Internal Rate of Return, IRR ü (3) Internal Rate of Return, IRR Internal Rate of Return

More information

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 5ed. Time Value Analysis

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 5ed. Time Value Analysis This is a sample of the instructor resources for Understanding Healthcare Financial Management, Fifth Edition, by Louis Gapenski. This sample contains the chapter models, end-of-chapter problems, and end-of-chapter

More information

Solutions to Chapter 8. Net Present Value and Other Investment Criteria

Solutions to Chapter 8. Net Present Value and Other Investment Criteria Solutions to Chapter 8 Net Present Value and Other Investment Criteria. NPV A = $00 + [$80 annuity factor (%, periods)] = $00 $80 $8. 0 0. 0. (.) NPV B = $00 + [$00 annuity factor (%, periods)] = $00 $00

More information

Compounding Quarterly, Monthly, and Daily

Compounding Quarterly, Monthly, and Daily 126 Compounding Quarterly, Monthly, and Daily So far, you have been compounding interest annually, which means the interest is added once per year. However, you will want to add the interest quarterly,

More information

NPV calculation. Academic Resource Center

NPV calculation. Academic Resource Center NPV calculation Academic Resource Center 1 NPV calculation PV calculation a. Constant Annuity b. Growth Annuity c. Constant Perpetuity d. Growth Perpetuity NPV calculation a. Cash flow happens at year

More information

TVM Appendix B: Using the TI-83/84. Time Value of Money Problems on a Texas Instruments TI-83 1

TVM Appendix B: Using the TI-83/84. Time Value of Money Problems on a Texas Instruments TI-83 1 Before you start: Time Value of Money Problems on a Texas Instruments TI-83 1 To calculate problems on a TI-83, you have to go into the applications menu, the blue APPS key on the calculator. Several applications

More information

9-17a Tutorial 9 Practice Review Assignment

9-17a Tutorial 9 Practice Review Assignment 9-17a Tutorial 9 Practice Review Assignment Data File needed for the Review Assignments: Restaurant.xlsx Sylvia has some new figures for the business plan for Jerel's. She has received slightly better

More information

Alternative Investment Rules. Data for Examples

Alternative Investment Rules. Data for Examples Alternative Investment Rules (Text reference: Chapter 6) Topics data for examples net present value (NPV) rule internal rate of return (IRR) rule payback rule discounted payback rule average accounting

More information

Capital Budgeting OVERVIEW

Capital Budgeting OVERVIEW WSG12 7/7/03 4:25 PM Page 191 12 Capital Budgeting OVERVIEW This chapter concentrates on the long-term, strategic considerations and focuses primarily on the firm s investment opportunities. The discussions

More information

Chapter 7. Net Present Value and Other Investment Criteria

Chapter 7. Net Present Value and Other Investment Criteria Chapter 7 Net Present Value and Other Investment Criteria 7-2 Topics Covered Net Present Value Other Investment Criteria Mutually Exclusive Projects Capital Rationing 7-3 Net Present Value Net Present

More information

Calculating Loan Payments

Calculating Loan Payments IN THIS CHAPTER Calculating Loan Payments...............1 Calculating Principal Payments...........4 Working with Future Value...............7 Using the Present Value Function..........9 Calculating Interest

More information

Why Use Net Present Value? The Payback Period Method The Discounted Payback Period Method The Average Accounting Return Method The Internal Rate of

Why Use Net Present Value? The Payback Period Method The Discounted Payback Period Method The Average Accounting Return Method The Internal Rate of 1 Why Use Net Present Value? The Payback Period Method The Discounted Payback Period Method The Average Accounting Return Method The Internal Rate of Return Problems with the IRR Approach The Profitability

More information

Investment Decisions and Capital Budgeting

Investment Decisions and Capital Budgeting Investment Decisions and Capital Budgeting FINANCE 350 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University 1 Issues in Capital Budgeting: Investment How should capital

More information

Chapter 8 Capital Budgeting Process and Techniques

Chapter 8 Capital Budgeting Process and Techniques Chapter 8 Capital Budgeting Process and Techniques MULTIPLE CHOICE 1. The capital budgeting process involves a. identifying potential investments b. analyzing the set of investment opportunities, and identifying

More information

10.SHORT-TERM DECISIONS & CAPITAL INVESTMENT APPRAISAL

10.SHORT-TERM DECISIONS & CAPITAL INVESTMENT APPRAISAL INDUSTRIAL UNIVERSITY OF HO CHI MINH CITY AUDITING ACCOUNTING FACULTY 10.SHORT-TERM DECISIONS & CAPITAL INVESTMENT APPRAISAL 4 Topic List INDUSTRIAL UNIVERSITY OF HO CHI MINH CITY AUDITING ACCOUNTING FACULTY

More information

CHAPTER 4. The Time Value of Money. Chapter Synopsis

CHAPTER 4. The Time Value of Money. Chapter Synopsis CHAPTER 4 The Time Value of Money Chapter Synopsis Many financial problems require the valuation of cash flows occurring at different times. However, money received in the future is worth less than money

More information

The Time Value of Money

The Time Value of Money The Time Value of Money Time Value Terminology 0 1 2 3 4 PV FV Future value (FV) is the amount an investment is worth after one or more periods. Present value (PV) is the current value of one or more future

More information

BF 6701 : Financial Management Comprehensive Examination Guideline

BF 6701 : Financial Management Comprehensive Examination Guideline BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1-hour exam. 2) The topics included in those essay and

More information

Which projects should the corporation undertake

Which projects should the corporation undertake Which projects should the corporation undertake Investment criteria 1. Investment into a new project generates a flow of cash and, therefore, a standard DPV rule should be the first choice under consideration.

More information

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Answers to Concepts Review and Critical Thinking Questions 1. A payback period less than the project s life means that the NPV is positive for

More information

Net Present Value and Other Investment Criteria

Net Present Value and Other Investment Criteria Net Present Value and Other Investment Criteria Topics Covered Net Present Value Other Investment Criteria Mutually Exclusive Projects Capital Rationing Net Present Value Net Present Value - Present value

More information

Using Basic Financial and Logical Functions

Using Basic Financial and Logical Functions LESSON 8 Using Basic Financial and Logical Functions 8.1 After completing this lesson, you will be able to: Use the PMT function to forecast loan payments. Calculate cumulative interest. Compute investment

More information

Chapter 9. Capital Budgeting Techniques

Chapter 9. Capital Budgeting Techniques Chapter 9 Capital Budgeting Techniques 1 Learning Outcomes Chapter 9 Describe the importance of capital budgeting decisions and the general process that is followed when making investment (capital budgeting)

More information

EXCEL PREREQUISITES SOLVING TIME VALUE OF MONEY PROBLEMS IN EXCEL

EXCEL PREREQUISITES SOLVING TIME VALUE OF MONEY PROBLEMS IN EXCEL CHAPTER 3 Smart Excel Appendix Use the Smart Excel spreadsheets and animated tutorials at the Smart Finance section of http://www.cengage.co.uk/megginson. Appendix Contents Excel prerequisites Creating

More information

Capital Budgeting: Decision. Example. Net Present Value (NPV) FINC 3630 Yost

Capital Budgeting: Decision. Example. Net Present Value (NPV) FINC 3630 Yost Capital Budgeting: Decision Criteria Example Consider a firm with two projects, A and B, each with the following cash flows and a 10 percent cost of capital: Project A Project B Year Cash Flows Cash Flows

More information

FIN 5413: Chapter 03 - Mortgage Loan Foundations: The Time Value of Money Page 1

FIN 5413: Chapter 03 - Mortgage Loan Foundations: The Time Value of Money Page 1 FIN 5413: Chapter 03 - Mortgage Loan Foundations: The Time Value of Money Page 1 Solutions to Problems - Chapter 3 Mortgage Loan Foundations: The Time Value of Money Problem 3-1 a) Future Value = FV(n,i,PV,PMT)

More information

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy? 1 You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each

More information

Investment Appraisal

Investment Appraisal Investment Appraisal Article relevant to F1 Business Mathematics and Quantitative Methods Author: Pat McGillion, current Examiner. Questions 1 and 6 often relate to Investment Appraisal, which is underpinned

More information

11 PERFORMING FINANCIAL ANALYSIS

11 PERFORMING FINANCIAL ANALYSIS 11 PERFORMING FINANCIAL ANALYSIS 11.1 Introduction When planning an energy efficiency or energy management project, the costs involved should always be considered. Therefore, as with any other type of

More information

The Time Value of Money

The Time Value of Money CHAPTER 7 The Time Value of Money After studying this chapter, you should be able to: 1. Explain the concept of the time value of money. 2. Calculate the present value and future value of a stream of cash

More information

Chapter 14 Notes Page 1

Chapter 14 Notes Page 1 Chapter 14 Notes Page 1 Capital Budgeting This chapter examines various tools used to evaluate potential projects or investments. Accountants advocate the use of the Simple Rate of Return, which is based

More information

Solutions to Time value of money practice problems

Solutions to Time value of money practice problems Solutions to Time value of money practice problems Prepared by Pamela Peterson Drake 1. What is the balance in an account at the end of 10 years if $2,500 is deposited today and the account earns 4% interest,

More information

Chapter 10. What is capital budgeting? Topics. The Basics of Capital Budgeting: Evaluating Cash Flows

Chapter 10. What is capital budgeting? Topics. The Basics of Capital Budgeting: Evaluating Cash Flows Chapter 10 The Basics of Capital Budgeting: Evaluating Cash Flows 1 Topics Overview and vocabulary Methods NPV IRR, MIRR Profitability Index Payback, discounted payback Unequal lives Economic life 2 What

More information

This is Time Value of Money: Multiple Flows, chapter 7 from the book Finance for Managers (index.html) (v. 0.1).

This is Time Value of Money: Multiple Flows, chapter 7 from the book Finance for Managers (index.html) (v. 0.1). This is Time Value of Money: Multiple Flows, chapter 7 from the book Finance for Managers (index.html) (v. 0.1). This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/

More information

Microsoft Excel - XP Intermediate

Microsoft Excel - XP Intermediate Microsoft Excel - XP Intermediate Financial Functions Goal Seeking Variable Tables IF Statements AND & OR Functions Mathematical Operations Between Separate Sheets Mathematical Operations Between Separate

More information

Continue this process until you have cleared the stored memory positions that you wish to clear individually and keep those that you do not.

Continue this process until you have cleared the stored memory positions that you wish to clear individually and keep those that you do not. Texas Instruments (TI) BA II PLUS Professional The TI BA II PLUS Professional functions similarly to the TI BA II PLUS model. Any exceptions are noted here. The TI BA II PLUS Professional can perform two

More information

Project Cost Management

Project Cost Management Project Cost Management Guide to Mathematical Questions PMI, PMP, CAPM, PMBOK, PM Network and the PMI Registered Education Provider logo are registered marks of the Project Management Institute, Inc. Present

More information

CAPITAL BUDGETING. Net Present Value and Other Investment Criteria

CAPITAL BUDGETING. Net Present Value and Other Investment Criteria CAPITAL BUDGETING Net Present Value and Other Investment Criteria Net Present Value (NPV) Net present value is the difference between an investment s market value (in today s dollars) and its cost (also

More information

EXAM 2 OVERVIEW. Binay Adhikari

EXAM 2 OVERVIEW. Binay Adhikari EXAM 2 OVERVIEW Binay Adhikari FEDERAL RESERVE & MARKET ACTIVITY (BS38) Definition 4.1 Discount Rate The discount rate is the periodic percentage return subtracted from the future cash flow for computing

More information

Project Evolution & Estimation :cash flow forecasting, cost benefit evolution techniques, risk evolution, Cost benefit analysis

Project Evolution & Estimation :cash flow forecasting, cost benefit evolution techniques, risk evolution, Cost benefit analysis Project Evolution & Estimation :cash flow forecasting, cost benefit evolution techniques, risk evolution, Cost benefit analysis EA Cost-benefit Analysis A standard way to assess the economic benefits Two

More information

COMPUTER APPLICATIONS IN BANKING & FINANCE. Salih KATIRCIOGLU

COMPUTER APPLICATIONS IN BANKING & FINANCE. Salih KATIRCIOGLU COMPUTER APPLICATIONS IN BANKING & FINANCE Salih KATIRCIOGLU Eastern Mediterranean University Faculty of Business and Economics Department of Banking and Finance Famagusta, Turkish Republic of Northern

More information

Chapter 6 Contents. Principles Used in Chapter 6 Principle 1: Money Has a Time Value.

Chapter 6 Contents. Principles Used in Chapter 6 Principle 1: Money Has a Time Value. Chapter 6 The Time Value of Money: Annuities and Other Topics Chapter 6 Contents Learning Objectives 1. Distinguish between an ordinary annuity and an annuity due, and calculate present and future values

More information

Capital Investment Appraisal Techniques

Capital Investment Appraisal Techniques Capital Investment Appraisal Techniques To download this article in printable format click here A practising Bookkeeper asked me recently how and by what methods one would appraise a proposed investment

More information

Module 10: Assessing the Business Case

Module 10: Assessing the Business Case Module 10: Assessing the Business Case Learning Objectives After completing this section, you will be able to: Do preliminary assessment of proposed energy management investments. The measures recommended

More information

Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions

Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 8 Capital Budgeting Concept Check 8.1 1. What is the difference between independent and mutually

More information

Problem Set: Annuities and Perpetuities (Solutions Below)

Problem Set: Annuities and Perpetuities (Solutions Below) Problem Set: Annuities and Perpetuities (Solutions Below) 1. If you plan to save $300 annually for 10 years and the discount rate is 15%, what is the future value? 2. If you want to buy a boat in 6 years

More information

Final Examination, BUS312, D1+ E1. SFU Student number:

Final Examination, BUS312, D1+ E1. SFU Student number: Final Examination, BUS312, D1+ E1 NAME: SFU Student number: Instructions: For qualitative questions, point form is not an acceptable answer. For quantitative questions, an indication of how you arrived

More information

Net Present Value and Capital Budgeting. What to Discount

Net Present Value and Capital Budgeting. What to Discount Net Present Value and Capital Budgeting (Text reference: Chapter 7) Topics what to discount the CCA system total project cash flow vs. tax shield approach detailed CCA calculations and examples project

More information

Chapter 5 Time Value of Money 2: Analyzing Annuity Cash Flows

Chapter 5 Time Value of Money 2: Analyzing Annuity Cash Flows 1. Future Value of Multiple Cash Flows 2. Future Value of an Annuity 3. Present Value of an Annuity 4. Perpetuities 5. Other Compounding Periods 6. Effective Annual Rates (EAR) 7. Amortized Loans Chapter

More information

Appendix C- 1. Time Value of Money. Appendix C- 2. Financial Accounting, Fifth Edition

Appendix C- 1. Time Value of Money. Appendix C- 2. Financial Accounting, Fifth Edition C- 1 Time Value of Money C- 2 Financial Accounting, Fifth Edition Study Objectives 1. Distinguish between simple and compound interest. 2. Solve for future value of a single amount. 3. Solve for future

More information

11. Introduction to Discounted Cash Flow Analysis and Financial Functions in Excel

11. Introduction to Discounted Cash Flow Analysis and Financial Functions in Excel 11. Introduction to Discounted Cash Flow Analysis and Financial Functions in Excel John Herbohn and Steve Harrison The financial and economic analysis of investment projects is typically carried out using

More information

Module 5: Interest concepts of future and present value

Module 5: Interest concepts of future and present value Page 1 of 23 Module 5: Interest concepts of future and present value Overview In this module, you learn about the fundamental concepts of interest and present and future values, as well as ordinary annuities

More information

The table for the present value of annuities (Appendix A, Table 4) shows: 10 periods at 14% = 5.216. = 3.93 years

The table for the present value of annuities (Appendix A, Table 4) shows: 10 periods at 14% = 5.216. = 3.93 years 21-18 Capital budgeting methods, no income taxes. The table for the present value of annuities (Appendix A, Table 4) shows: 10 periods at 14% 5.216 1a. Net present value $28,000 (5.216) $146,048 $36,048

More information

MODULE 2. Capital Budgeting

MODULE 2. Capital Budgeting MODULE 2 Capital Budgeting Capital Budgeting is a project selection exercise performed by the business enterprise. Capital budgeting uses the concept of present value to select the projects. Capital budgeting

More information

Chapter 1: The time value of money *

Chapter 1: The time value of money * Chapter 1: The time value of money * minor bug fix: September 9, 2003 Chapter contents Overview... 2 1.1. Future value... 3 1.2. Present value... 18 1.3. Net present value... 26 1.4. The internal rate

More information

http://spreadsheetml.com/finance/bondvaluationyieldtomaturity.shtml

http://spreadsheetml.com/finance/bondvaluationyieldtomaturity.shtml Financial Modeling Templates http://spreadsheetml.com/finance/bondvaluationyieldtomaturity.shtml Copyright (c) 2009-2014, ConnectCode All Rights Reserved. ConnectCode accepts no responsibility for any

More information

Answers to Warm-Up Exercises

Answers to Warm-Up Exercises Answers to Warm-Up Exercises E10-1. Answer: E10-2. Answer: Payback period The payback period for Project Hydrogen is 4.29 years. The payback period for Project Helium is 5.75 years. Both projects are acceptable

More information

Introduction to Discounted Cash Flow and Project Appraisal. Charles Ward

Introduction to Discounted Cash Flow and Project Appraisal. Charles Ward Introduction to Discounted Cash Flow and Project Appraisal Charles Ward Company investment decisions How firms makes investment decisions about real projects (not necessarily property) How to decide which

More information

1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%?

1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%? Chapter 2 - Sample Problems 1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%? 2. What will $247,000 grow to be in

More information

Statistical Models for Forecasting and Planning

Statistical Models for Forecasting and Planning Part 5 Statistical Models for Forecasting and Planning Chapter 16 Financial Calculations: Interest, Annuities and NPV chapter 16 Financial Calculations: Interest, Annuities and NPV Outcomes Financial information

More information

Chapter 6. Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams

Chapter 6. Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams Chapter 6 Learning Objectives Principles Used in This Chapter 1. Annuities 2. Perpetuities 3. Complex Cash Flow Streams 1. Distinguish between an ordinary annuity and an annuity due, and calculate present

More information

Performing Net Present Value (NPV) Calculations

Performing Net Present Value (NPV) Calculations Strategies and Mechanisms For Promoting Cleaner Production Investments In Developing Countries Profiting From Cleaner Production Performing Net Present Value (NPV) Calculations Cleaner Production Profiting

More information

Time Value of Money. 15.511 Corporate Accounting Summer 2004. Professor S. P. Kothari Sloan School of Management Massachusetts Institute of Technology

Time Value of Money. 15.511 Corporate Accounting Summer 2004. Professor S. P. Kothari Sloan School of Management Massachusetts Institute of Technology Time Value of Money 15.511 Corporate Accounting Summer 2004 Professor S. P. Kothari Sloan School of Management Massachusetts Institute of Technology July 2, 2004 1 LIABILITIES: Current Liabilities Obligations

More information

Net present value is the difference between a project s value and its costs.

Net present value is the difference between a project s value and its costs. 1 2 Net present value is the difference between a project s value and its costs. We need to calculate the Present Value of future cash flows (discounted by the opportunity cost of capital) and subtract

More information

Discounted Cash Flow Valuation

Discounted Cash Flow Valuation BUAD 100x Foundations of Finance Discounted Cash Flow Valuation September 28, 2009 Review Introduction to corporate finance What is corporate finance? What is a corporation? What decision do managers make?

More information

CHAPTER 4 DISCOUNTED CASH FLOW VALUATION

CHAPTER 4 DISCOUNTED CASH FLOW VALUATION CHAPTER 4 DISCOUNTED CASH FLOW VALUATION Solutions to Questions and Problems NOTE: All-end-of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability

More information

How to calculate present values

How to calculate present values How to calculate present values Back to the future Chapter 3 Discounted Cash Flow Analysis (Time Value of Money) Discounted Cash Flow (DCF) analysis is the foundation of valuation in corporate finance

More information

Module 5: Interest concepts of future and present value

Module 5: Interest concepts of future and present value file:///f /Courses/2010-11/CGA/FA2/06course/m05intro.htm Module 5: Interest concepts of future and present value Overview In this module, you learn about the fundamental concepts of interest and present

More information

Hewlett Packard (HP) 10BII

Hewlett Packard (HP) 10BII Hewlett Packard (HP) 10BII The HP10BII is programmed to perform two basic types of operations: statistical operations and financial operations. Various types of computations are activated by depressing

More information

FI 302, Business Finance Exam 2, Fall 2000 versions 1 & 8 KEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEY

FI 302, Business Finance Exam 2, Fall 2000 versions 1 & 8 KEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEY FI 302, Business Finance Exam 2, Fall 2000 versions 1 & 8 KEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEYKEY 1. (3 points) BS16 What is a 401k plan Most U.S. households single largest lifetime source of savings is

More information

Investments. 1.1 Future value and present value. What you must be able to explain:

Investments. 1.1 Future value and present value. What you must be able to explain: Investments What you must be able to explain: Future value Present value Annual effective interest rate Net present value (NPV ) and opportunity cost of capital Internal rate of return (IRR) Payback rule

More information

Discounted Cash Flow Valuation

Discounted Cash Flow Valuation Discounted Cash Flow Valuation Chapter 5 Key Concepts and Skills Be able to compute the future value of multiple cash flows Be able to compute the present value of multiple cash flows Be able to compute

More information

CHAPTER 6 PROJECT CASH FLOW

CHAPTER 6 PROJECT CASH FLOW CHAPTER 6 PROJECT CASH FLOW In the previous chapters, techniques for project planning, scheduling, resources management, and timecost trade off have been introduced. This chapter will deal with project

More information

CHAPTER 6 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA

CHAPTER 6 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA CHAPTER 6 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Answers to Concepts Review and Critical Thinking Questions 1. Assuming conventional cash flows, a payback period less than the project s life means

More information

TIME VALUE OF MONEY #6: TREASURY BOND. Professor Peter Harris Mathematics by Dr. Sharon Petrushka. Introduction

TIME VALUE OF MONEY #6: TREASURY BOND. Professor Peter Harris Mathematics by Dr. Sharon Petrushka. Introduction TIME VALUE OF MONEY #6: TREASURY BOND Professor Peter Harris Mathematics by Dr. Sharon Petrushka Introduction This problem assumes that you have mastered problems 1-5, which are prerequisites. In this

More information

METHOD FOR PROJECT APPRAISAL: NET PRESENT VALUE OR NPV The sum of discounted cash flows.

METHOD FOR PROJECT APPRAISAL: NET PRESENT VALUE OR NPV The sum of discounted cash flows. OBJECTIVE: ECONOMIC ANALYSIS OF A PROJECT, consisting of the operation of a new incineration plant by the municipality. In particular we are interested in the computaton of a Solid Waste Tariff, consistent

More information

MODELING ANALYSIS WITH EXCEL

MODELING ANALYSIS WITH EXCEL APPENDIX A MODELING ANALYSIS WITH EXCEL A-1 INTRODUCTION A-2 RELATIVE ADDRESSING A-3 ABSOLUTE ADDRESSING A-4 MIXED ADDRESSING A-5 FINANCIAL FUNCTIONS A-5-1 FV(Rate,Nper,Pmt,Pv,Type) A-5-2 NPV(Rate,Value1,Value2,

More information

F V P V = F V = P (1 + r) n. n 1. FV n = C (1 + r) i. i=0. = C 1 r. (1 + r) n 1 ]

F V P V = F V = P (1 + r) n. n 1. FV n = C (1 + r) i. i=0. = C 1 r. (1 + r) n 1 ] 1 Week 2 1.1 Recap Week 1 P V = F V (1 + r) n F V = P (1 + r) n 1.2 FV of Annuity: oncept 1.2.1 Multiple Payments: Annuities Multiple payments over time. A special case of multiple payments: annuities

More information

Appendix. Time Value of Money. Financial Accounting, IFRS Edition Weygandt Kimmel Kieso. Appendix C- 1

Appendix. Time Value of Money. Financial Accounting, IFRS Edition Weygandt Kimmel Kieso. Appendix C- 1 C Time Value of Money C- 1 Financial Accounting, IFRS Edition Weygandt Kimmel Kieso C- 2 Study Objectives 1. Distinguish between simple and compound interest. 2. Solve for future value of a single amount.

More information

Time Value of Money 1

Time Value of Money 1 Time Value of Money 1 This topic introduces you to the analysis of trade-offs over time. Financial decisions involve costs and benefits that are spread over time. Financial decision makers in households

More information

Chapter 9: Net Present Value and Other Investment Criteria. Faculty of Business Administration Lakehead University Spring 2003 May 20, 2003

Chapter 9: Net Present Value and Other Investment Criteria. Faculty of Business Administration Lakehead University Spring 2003 May 20, 2003 Chapter 9: Net Present Value and Other Investment Criteria Faculty of Business Administration Lakehead University Spring 2003 May 20, 2003 Outline 9.1 Net Present Value 9.2 The Payback Rule 9.3 The Average

More information